Bond Mutual Funds: Winners and Losers Report

(April 10th 2012)  Bond Mutual Funds have not performed well over the last 30 days. Many of the major categories of bond funds declined in value, with nearly half giving negative returns.

The two highest performing fund categories were Bank Loan funds and Intermediate Government funds. According to Morningstar, these categories gained 0.67% and 0.37% respectively during the month. However, Emerging Markets Bond funds and High Yield Bond funds remained this year’s top performers, returning 6.59 percent and 5.12 percent respectively, since Jan 2012.

In general, when both corporate bonds and government bond mutual funds rise in value, interest rates have gone down, which increases the value of their bond holdings.  However, the marginal increases in value in Bank Loan funds and Intermediate Government Funds cannot be attributed just to changes in interest rates. When these two categories lead the pack, it means the market is gravitating to less risky assets.

To understand changes in the market, it’s useful to compare the relative performance of a few related categories:

Intermediate Term Bonds: Corporate vs Government

Winner: Government Bonds

Biggest Monthly Gainer: BlackRock GNMA Instl (BGNIX)

Government bond funds outperformed Corporate Bond mutual funds by nearly half a percentage point gaining 0.37% in value during the month. Corporate bonds returned -0.10% during the period. An increase in government bond fund values relative to corporate bond funds indicates a move from risky to safer assets.

Government Bonds: Short vs. Intermediate vs Long Term

Winner: Intermediate Government Bonds

Biggest Monthly Gainer: BlackRock GNMA Instl (BGNIX)
Overall, government bond mutual funds did not have much movement. Intermediate funds increased in value by 0.37%, outperforming short-term bonds, which gained 0.07%. Small movements in returns may have more to do with short-term supply and demand rather than long-term trends. To put these moves in perspective, Long-term Government Bond mutual funds rose 32.14% over the last year.

 

Corporate Bonds: Investment Grade vs. Junk

Winner: Investment Grade

Biggest Gainer: PIMCO Income Instl (PIMIX)

Junk Bonds declined -0.12% for the month while Investment grade bonds were down by a more modest -0.02 percent. Clearly investors are rebalancing their portfolios and have become risk averse, preferring high-quality investment grade bonds over junk issues.

 

International Bonds: World Bond funds vs Emerging Market bond funds

Winner: World Bond funds

Biggest Gainer: Chou Income (CHOIX)

Emerging Market Bonds can include countries like Brazil, India, Russia, and South Africa. World bonds generally refer to developed nations such as Germany, Japan, and The United Kingdom. While all international bonds did well, those of developed nations did better. This can be indicative of a two potential trends: 1) higher risk of financial contagion from Europe resulting in flight of capital to developed economies, and 2) emerging market economies may get affected by the European slowdown.

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